Personal Investor: Pump and dump lessons from bitcoin and cannabis
The old pump and dump scam has been around since the beginning of time, but 2018 brought two examples of how social media can help bring it on at high speed.
The hype around bitcoin and cannabis stocks helped launch the prices of both way beyond any realistic fundamentals. In the case of the cryptocurrency, there were no fundamentals – just an intangible belief they were worth something. That belief jolted the price of the cryptocurrency by 1,638 per cent from April 2017 to December 2017. Over the course of 2018 it plunged to one-fifth of its perceived value.
Some cannabis stocks weathered 2018 better than others, but the hype surrounding Canada’s legalization of recreational cannabis starting Oct. 17 boosted the sector as a whole (measured by the Horizons Marijuana ETF) by 80 per cent in the preceding two months only to give it all back once expectations became reality.
By the time both reached their highs the pump and dumpers had cashed out and, in some cases, taken short positions. It’s hard to tell the difference between true believers and pump and dumpers on social media but here are three warning signs that you might be getting played:
- It can only go up: Advice that doesn’t recognize the risk of something going down in price is bad advice. In investment lingo it’s called “talking your book.” In most cases the advice is coming from someone who owns the security and wants to get everyone on board to move the price higher.
- Act now before it’s too late: Creating a false sense of urgency is an old trick to discourage investors from properly researching their purchases.
- It’s complicated: Many pump and dumpers try to bamboozle their marks with jargon that doesn’t add up. That’s especially true with bitcoin’s pretzel-like mathematical formulas that seem to prove it is the currency of the future.
How bitcoin can have any value is a bit of a head-scratcher even at the current price but that’s not to say cryptocurrencies or cannabis stocks are worthless. Prices of any investment boil down to underlying earnings, and if the earnings can’t justify the price in 2019 – it’s all just hype.